The Wall Street Journal

Whistling Past Big Steel's Graveyard

On Wednesday the House passed one of the most blatantly protectionist pieces of legislation since the 1930s. Reacting to anguished cries from the steel industry and its rapidly declining unionized workforce, the House voted to impose quotas on imported steel for three years. But no amount of protection will save the declining steel companies and their workers, whose primary threat is not imports but new, smaller American companies.

Over the past 30 years, there have been so many bouts of trade protection for the U.S. steel giants—Bethlehem, USX, Inland, LTV and so on—that they have become quite practiced in seeking import restrictions. Cries of "unfair dumping" or "subsidization" ring out from Pittsburgh or Chicago every five or 10 years, whenever the world steel market is roiled by any of a number of disruptions.

The most recent source of agony is last year's economic collapse in Russia and Southeast Asia. Steel prices fell dramatically last year when imports from countries including Russia, South Korea and Brazil surged in response to abrupt changes in demand and currency prices. The import price of garden-variety sheet steel fell by more than $50 a ton to well under $300. U.S. companies were forced to respond by reducing their prices.

The disruption caused by the sharp fall in import prices would likely have been temporary even without the usual dumping suits and warnings from Congress. Some of the larger U.S. companies would undoubtedly have had to consider layoffs and even perhaps accelerate the closure of some facilities that would close in the next two or three years anyway. Other, marginal producers might have faced insolvency. But the new, smaller "minimill" producers would have suffered less, because they already have lower costs and because, unlike their larger brethren, they rely heavily on scrap to feed their furnaces. When steel prices plummet, so do the prices of scrap. The result is that the minimill companies can more easily ride out downturns in steel prices. Many operated at a profit even during last year's collapse of prices.

It would be difficult to overestimate the effect that the new minimills have had on their older, more lethargic Big Steel competitors. Starting from almost nothing in the mid-1960s, these companies have increased in number and in size to account for about 45% of the country's current carbon-steel capacity. The pace of minimill expansion has increased, and the opening of several new sheet-producing minimill plants undoubtedly added to last year's downward price spiral.

These minimill companies are so efficient that they employ only about 30,000 workers, compared with some 105,000 for the larger companies. The most successful of the new minimill companies, Nucor, has never laid off a steelworker in its 30 years. The plants operated by Nucor, North Star, Birmingham, Bayou, Keystone, Quanex and the other 40 or so minimill producers rarely employ more than 500 workers. These plants are spread all over the country, mostly in small towns. This diminishes the political need to worry about the effects of major steel layoffs when the world market takes an unfortunate turn.

In defending the House's blatantly protectionist steel legislation, Rep. Joe Moakley (D., Mass.) was quoted as saying that "not every American is sharing in the good times. . . . Ten thousand steelworkers lost their jobs last year." Apparently Mr. Moakley is unaware that the steel industry has been shedding employees at this rate for three decades. In the mid-1960s, steel employed more than 600,000 workers. Today, it produces about the same amount of steel with only 230,000 workers. Mr. Moakley and his allies in Congress would rather blame foreigners for these productivity gains than acknowledge that such job losses are simply a reflection of increased efficiency.

Today there is very little left of the old "integrated" steel sector. Thirteen companies still employ massive outdated blast furnaces, coke ovens and oxygen furnaces to produce steel from coal, iron ore and limestone. These companies now have only about 60 million tons of capacity, down from 145 million tons just two decades ago. The inflation-adjusted price of the carbon-sheet steels they produce has fallen by an astonishing 40% in these 20 years, even before the recent surge in imports, in large part because of the minimill competition and lower resource prices. The combined market capitalization of all 13 of these firms is barely above $6 billion, less than one-third of the value of the Internet bookseller Amazon.com. On most days the market capitalization of Microsoft rises or falls by more than the market cap of the entire U.S. integrated steel industry.

The total market value of these old steel companies' total assets is now between $11 billion and $12 billion, or about $200 per ton of capacity. This is the same as the cost per ton of building new minimill plants. Were any of the large companies to try to rebuild their plants, they would probably have to spend about $1,500 per ton of capacity for the blast furnaces, coke ovens, steel furnaces and other equipment. Needless to say, such a strategy would be disastrous. The last large integrated U.S. steel plant, Bethlehem's factory on Lake Michigan, was built in the 1960s. Any U.S. steel firm that tried to replicate just this one plant today would quickly be forced into bankruptcy.

Equally important, the large integrated steel companies, with their ponderous bureaucracies and unionized workforces, simply cannot build and operate minimills in competition with the smaller, entrepreneurial companies. Only one of the large companies, LTV, has as much as a partial interest in a new minimill company. A Canadian integrated steel company, Dofasco, has had difficulties making a joint-venture minimill in Kentucky operate successfully.

If it makes no sense to replace the old companies' declining plants with the same technology, and if they cannot compete with the minimills in building the scrap-based electric-furnace technology, they surely have no future. What is it then that the protectionists want to save? The old integrated companies are now such a small part of the economy as to be virtually unnoticed by Wall Street. The entire lot of them is smaller than the 100th-largest U.S. industrial company. They still employ 105,000 workers or so, but this is only 0.07% of the U.S. labor force. Their total employment will continue to decline regardless of U.S. import policy as the minimill companies keep expanding.

A short-term rise in steel prices caused by any Washington-crafted trade protection will only lead the minimills to expand more rapidly. In short, the end is approaching for Big Steel as the new, entrepreneurial companies continue to replace them. Already Nucor has nearly twice the market capitalization of USX, the largest of the remaining old-line U.S. steel companies. No amount of trade protection will change that balance.